Struggle for Central Asian energy riches

Oil worker/section of Tengiz-Novorossiisk pipeline (pic: KazMunaiGaz) Russia pumps oil from Kazakhstan to a Black Sea port for export

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A year ago, the Kremlin issued a stark warning: that growing competition for control of global energy resources could spark wars on Russia's borders, including those in Central Asia.

"Problems that involve the use of military force cannot be excluded, that would destroy the balance of forces close to the borders of the Russian Federation and her allies," said a key Kremlin strategy document assessing the main security threats of the coming decade.

Just 20 years ago, Russia and the energy-rich countries of Central Asia, such as Kazakhstan and Turkmenistan, and Azerbaijan in the South Caucasus, were all united, as parts of the Soviet Union.

Moscow would have had unfettered access to their oil and gas reserves.

But the Central Asian states realise one of their greatest strategic strengths as independent countries is playing off the big global powers now scrambling to buy their precious energy supplies.

So, Moscow now finds itself in fierce competition with the big players: China, the US and Europe.

"Russia's overall position in Central Asia is shrinking," says Mikhail Kroutikhin, editor-in-chief of the Russian Energy Weekly.

"Russia is in retreat and the Chinese are jumping on the big opportunities."

New 'Great Game'?

Rivalry in the region is often compared with the 19th Century British-Russian imperial rivalry nicknamed the "Great Game".

Opening ceremony for Turkmenistan-China gas pipeline, 14 Dec 09 China's president officially opened the Turkmenistan-China gas pipeline

The past year has seen some key moments in the new energy "Great Game" in Central Asia, with the first pipelines being commissioned that take oil and gas east to China, instead of north and west.

From Kazakhstan, 200,000 barrels of oil are now being pumped every day across the border into the western Chinese province of Xinjiang, and there are plans to double this pipeline's capacity.

From Turkmenistan, a pipeline carrying gas to China via Uzbekistan and Kazakhstan was opened last December by the Chinese President Hu Jintao. It could satisfy around half of China's current demand by the time it reaches full capacity in 2013.

Turkmenistan's President Kurbanguly Berdymukhamedov called the deal "political" as well as commercial and heaped praise on China's "wise policy", saying it had become "one of the key guarantors of global security".

Turkmen tensions

With this agreement, Russia's stranglehold on supplies from Turkmenistan, which has the fourth-largest reserves of gas in the world, was broken.

And while China and its new Central Asian energy partners were locking themselves in an ever-warmer embrace, Moscow found itself at loggerheads with its erstwhile client state.

Having agreed two years ago to pay a much higher price for Turkmen gas, to ensure it remained a loyal supplier, the Russians suddenly shut the taps 12 months ago, causing the pipeline to explode.

Analysts believe Moscow had decided it did not need the gas because of the downturn in global demand and prices during the economic crisis.

Even now it is only taking a third of what it was expected to buy, angering the Turkmen government and pushing it further into the arms of the Chinese.

Oil production - 2008 Bar chart shows oil production in central Asia, Middle East and Russia
Proven oil reserves - 2008 Bar chart shows oil reserves in central Asia, Middle East and Russia
Gas production - 2008 Bar chart shows gas production  in central Asia, Middle East and Russia
Proven gas reserves - 2008 Bar chart shows gas reserves in central Asia, Middle East and Russia
Who will feed Nabucco?

"As regards Russia's role in the region, it has taken a step back in energy," says Chris Weafer, chief strategist at Uralsib Bank in Moscow.

He believes it was not just the global economic crisis that prompted this.

It was also, he says, because Europeans searching for gas supplies for their planned Nabucco pipeline were offering much higher prices for Central Asian gas.

"The game changed because of Nabucco. Up to 2006, Russia could buy cheap gas from Turkmenistan, Uzbekistan and Kazakhstan - $50 for 1,000 cubic metres and then sell it to Europe for $250.

"But from the start of 2008, Russia had to agree to pay European prices - $300 per 1,000 cubic metres."

"Gazprom was not making any money out of it. So the political will to be involved has abated. Russia has let the Chinese into Central Asia."

And that is something Moscow may ultimately come to regret, because it also wants to be a major supplier of oil and gas to China.

Gas pipelines to China

With China already heavily investing in the two most important Central Asian energy suppliers, Turkmenistan and Kazakhstan, Russia may struggle to compete.

China flexes its muscles

Moscow has had agreements with Beijing to build a gas pipeline into China since 2002, but the two sides have been haggling ever since over the price of the gas supplies.

Analysts say a deal may finally have been done - on the condition that the gas comes from a field and pipeline that are exclusively for Chinese use.

Officials also hope the first oil pipeline between the two countries will be completed by the end of this year.

But some analysts question whether Russia will have sufficient reserves to supply the gas pipeline, given the expected decline in its production over the next 20 years and the lack of investment in new fields since the collapse of the Soviet Union in 1991.

"It [the pipeline to China] will have to tap reserves already going to Europe," says Mikhail Kroutikhin.

"It is not economic, but Prime Minister Putin wants it to be built."

South Stream

Another project which Mr Putin is determined should go ahead is Russia's South Stream gas pipeline, across the Black Sea and into the heart of the European Union.

The rivalry between this and Europe's alternative plan - the Nabucco pipeline - is one of the most intense in the Caspian Sea region.

The Europeans, who want to break free from their growing dependence on Russian energy supplies, desperately need supplies from the region to make the Nabucco pipeline viable.

And the Russians are trying to thwart this.

One key battleground is Azerbaijan, which has yet to declare whether it will feed Nabucco with its gas. Its decision is critical.

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